We have compared the current financial crises with those which have occurred in the past and considered some of the factors which influence and trigger banking crises. These include the asset price bubbles, government, banking management and the general public. We can see that crises are the product of unfavourable combinations of unexpected events in the market place, and are difficult to predict.
This final blog will briefly look at what
is being done to recover from the financial crises and how we can avoid similar
situations in the future. We have seen recent improvements in the markets. Our
economy will recover, and be resilient to housing market crashes in the future
and the problems associated with having banks which partake in high levels of
risk shifting. However it is inevitable that there will be other crises,
triggered by new combinations of harmful events. Like the human body responding
to infection, it will remember how to produce the financial antibodies to fend
off this crisis, but is still vulnerable to new unknown diseases.
Reinhart and Roghoff (2009) look at the
aftermath of recent and historical banking crises around the world. They
highlight that during a financial crises the real equity price decline crash
the average historical crises period is 3.8 years, that is from the start of
the economic downturn until the market is considered to be recovered. This
follows an average 55.9% decline in asset prices. This paper also looks at individual housing market crashes. The average recovery time for a housing market crash is found to be over 6 years. With this in mind we would
expect our current financial crises to be winding down soon, however due to the size
and global contagion of the great recession it is taking longer to recover.
We are seeing signs of improvements
however, markets are very slowly recovering and also an increased public calling for stronger banking regulation will put pressure on the banks to be more careful in the future. We
have witnessed the government’s crunch on spending, in a bid to reduce the
debt, and also the public anguish created by the decrease in jobs and increase
in prices and decrease in public services. Of course these actions, however
unpopular are necessary to try and restore our economy.
In a perfect world a combination of
responsible borrowing and lending, good regulation and banking management would
be able to remove the risk of bank failures, but this is not realistic. I
believe that financial crises are like any natural disaster, you don’t know
when or where they will happen next, all you can do is be prepared for the
worst.
FIN
Reinhart C. M. & Roghoff K. S.
“International Aspects of Financial-Market Imperfections, The Aftermath of
Financial Crises” American Economic Review: Papers & Proceedings 2009,
99:2, 466–472
